Bernanke to Stay Course on Policy; Sees Little Inflation Concern

Shelby pointed to the toxic situation in the late 1970s and 1980s when inflation hit double digits. To combat out-of-control prices, Fed Chairman Paul Volcker ratcheted up interest rates. Unemployment soared. And the economy fell into a deep recession.

Bernanke said the rise in oil and global commodities prices was due to stronger demand from fast-growing countries like China, not to the Fed's stimulative policies. But he ran into concerns from Democrats as well as Republicans on the committee.

"I see food prices rising," said Sen. Robert Menendez, D-N.J. "I see gas prices rising even before what was happening in North Africa, although that certainly is an exacerbating reality. Tuition rates rising… I just see a combination of rising prices for the average family."

One reason the Fed launched the bond-buying program in November was to prevent deflation — a prolonged drop in prices of goods, wages and values of homes and stocks. But Bernanke told lawmakers that the risk of deflation has become "negligible."

Political upheaval in the Middle East has caused oil and gasoline prices to march higher, Bernanke said. Still, the Fed chief said he and a majority of his colleagues say they believe the situation won't cause out-of-control inflation.

Workers have little power to demand big pay increases because the jobs market is still weak. That will prevent inflation from igniting, Bernanke said.

The Fed regularly reviews its bond-purchase program. It could buy fewer securities if the economy were to grow more strongly than anticipated or if inflation showed signs of breaking out. Or it could buy more if the economy was in danger of weakening. Most economists believe the Fed will spend the full $600 billion on schedule.

On a separate issue, Bernanke said a failure by Congress to boost the government's borrowing authority would be an "extremely dangerous and a recovery-ending event."

Republicans in Congress want to link any increases in the nation's debt limit to cuts in federal spending to reduce the budget deficit. Democrats oppose that strategy.

In the unlikely event that Congress didn't raise the debt ceiling, the federal government wouldn't be able to pay its bills, triggering a crisis, Bernanke said. Interest rates would spike, slowing spending by Americans and derailing the recovery.

Bernanke also said that a House Republican plan to cut spending would reduce economic growth and employment. But he suggested the impact would be limited.

Republicans want to slash $60 billion-plus from agency budgets in coming months as a down payment on larger cuts later in the year. But they are settling for just $4 billion in especially easy cuts as the price for a two-week stopgap bill to avert a government shutdown.